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Asian mkts not to hit recent lows again: CLSA

Published on Mon, Nov 03, 2008 at 09:41 | Source : CNBC-TV18

Updated at Wed, Dec 03, 2008 at 14:16

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Chris Wood of CLSA expects a renewed realization of earnings slow down in 2009 but does not expect Asian markets to hit recent lows again. He estimates India's FY09 GDP (gross domestic product) numbers to be at 6.5%- 7%.

Wood's target for the S&P 500 during the relief rally is at 1200 and said that the rally would be a counter turn rally, which would begin in October. He believes problems in the western world are structural in nature and sees an opportunity to exit at higher levels.

Wood sees a relief rally in the fourth quarter. He said that this relief rally would be led by policy measures from the government and central bankers. He added that the US Presidential election would affect the investor sentiment and feels a democratic landslide win in US elections would help psychology.

Here is a verbatim transcript of the exclusive interview with Chris Wood on CNBC-TV18. Also watch the accompanying video.

Q: How do you read this global pullback? Is it just a relief rally or do you think we saw some kind of bottom a few days back?

A: The fourth quarter of this year would see the commencement of a relief rally driven by the massive policy response in the Western world to the financial crises and all the effects to put tax payers money into banks or increasing aggressive actions by the US Government Treasury - Fed to fund commercial paper programmes. We should not underestimate the impact of the Presidential election on psychology in the US. A Democratic landslide would bring about a change in the US and make people more optimistic.

I had been expecting the commencement of a counter trend rally to begin at some point in October. Markets generally bottom in October. My target for the S&P 500 in this rally is about 1,200. This would be a countertrend relief rally, driven by hopes that the policy response in the US, the Western world would lead to a less severe economic downturn than what markets are currently discounting. So yes I am expecting a counter trend rally.

Q: What happens after that? Do you think the market would go back and retest those lows because of earnings and macro concerns which will come to the fore once again?

A: The countertrend rally would be sufficient for the 1200 level on the S&P. That would be the peak of the rally and people would start to think some of these problems have been solved.

Sentiment would come into play. That will be an opportunity to reduce positions because in my view these problems in the Western world based on the massive indebtedness are structural in nature. There is a structural deflationary problem driven by excess indebtedness similar to what we have seen in Japan since beginning of 1990s.

The more the policy makers put taxpayer's money in to solve the problem the more they will stop at a V-shape downturn like in Asian crisis; a downturn at the cost of more extended period of sub-par growth.

So yes, as 2009 kicks in, there will be renewed realization that growth is really slowing and there is no easy way out for these problems. Asian markets will not fall as low as they had hit in the last week.

By Q2 of 2009, it is going to become clear as to how Asian economies are going to grow in 2009.

CLSA's forecast is 8% of Chinese growth in 2009 and 6.5-7% in India. If India and China actually succeed in achieving those sorts of growth rates in the context of US and European economies not growing at all, it would actually be quite an impressive performance.

But in my view you are only going to get real realization or understanding whether such growth rates are practically possible by about Q2 in 2009.

If China does achieve growth rates of 8%, India 6.5-7% in the next year, then I believe you will start to get an incremental decoupling but only very incremental from about Q2 next year.

In the meantime though Asian markets will remain a slave as they have been all of this year to the US correlation. So Asian markets are only going to rally right now if my expectation of a further rally in the S&P is correct.

Q: How much more would you give this pullback rally for Asian markets? Do you see it as a tactical time to start increasing positions on Asian markets or emerging markets?

A: I would have already increased position in Asian markets in the last two weeks. I frankly would have started buying a bit too early. But I think Asian markets can rally in the context of S&P rallying to 1200. If the S&P rallies to 1,200 in the next few weeks, couple of months based on growing euphoria on Presidential election etc my guess is that Asian markets would outperform in that rally and Asian financial stocks would outperform. So in such a rally, I would like to invest in the banking sector in India.

Q: What have you made of the sharp falls in some of the Asian currencies? Do you see it as a situation where they might rebound now or is there a danger of further collapse in some of them?

A: There is still a danger. In the context of my hypothetical relief rally here, I think some of the pressure on the currencies will be redressed in the short-term. But if we get further moves down next year due fundamental structural problems in the Western world, we will retest these lows we are seeing. The US market is vulnerable to going lower next year than what it has hit already. In that environment, if the dollar remains strong based on de-leveraging there will be more pressure on Asian currencies.

The only problem Asia faces right now is a cyclical problem. Asia does not have big indebtedness. The structural problems right now are in the Western world and not the emerging markets. The only emerging markets globally that has what I would call a structural problem are Central and Eastern Europe. These countries are on the periphery of euro land with a big debt, big current account deficits and big foreign currency borrowing. In my view that situation doesn't apply to India or Asia. Long-term investors have an opportunity to buy Indian stocks with a cheap currency. Asian currencies will appreciate in the long-term.

Q: How many quarters of earnings pain will we have to see globally? You used the term extended period of slowdown, I am just trying to get a sense of how long you think we will take to get out of this bear market?

A: We are going to have earnings pain for the next several quarters in the Western world and in Asia. But the key point where the Asian markets hit last week which is 220-230 on MSCI Asia ex-Japan index, the markets were in my view discounting dramatic earnings decline next year already.

The analysts are still forecasting earnings growth next year but the markets are way beyond the analysis. So that is why this is only going to be a relief rally. But I do believe there is going to be earnings downturns.

The markets are discounting a much worse outcome already than what analysts are forecasting. So to that extent there is scope for relief rally. But then we have to deal with the earnings problems.

We are now at a transition point. The financial crisis has been running since sub-prime problems first emerged early 2007, this is increasingly going to metamorphose more into problems for the real economy.

So the focus on the Western world is going to switch from banks going burst or nearly going burst because taxpayers' money saves them to more mundane but real world issues of companies reporting losses or bad earnings and people losing their jobs.

Q: There has been some large scale policy action through this month across markets in the world. Do you sense a lot more coming and do you think there is now a tangible thawing in the credit market or not yet?

A: No, that is one key reason I am expecting relief rally. I think there is a tangible floor and the interbank rates are coming down. But, very importantly the US commercial paper issuance is suddenly picking up dramatically in the last several days because the Fed has started to buy this US commercial paper directly. I think that is one key development, which will drive the relief rally.